here's some interesting thoughts:
Subj: Raging Bull's Cyberstock Investor Report - August 6
Date: 8/6/99 9:07:03 PM Eastern Daylight Time
From: ragingbull@um2.unitymail.com (ragingbull)
To: ragingbull@um2.unitymail.com (Raging Bull)
RAGING BULL'S CYBERSTOCK INVESTOR REPORT
"Your Weekly Internet Stock Newsletter"
August 6, 1999
"Now Read By Over 150,000 CyberInvestors Weekly"
Editor: Matthew W. Ragas
ragingbull.com
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***RAGAS SPEAKS FOR THE WEEK***
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Bleed the competition!
The mock combat drills are over. The cyberpeace pipe has been crushed, and the
opposing troops from Dulles, Virginia, have headed back to their bunkers. There
will be no more warning shots fired across the bow of the U.S.S. America Online
(AOL) by Admiral Gates. The beast from Redmond, Washington, has officially
declared war against AOL, and this time I don't see Gates & Co. taking any
prisoners. In fact, if Microsoft (MSFT) now holds true to its most recent
promises, I believe it risks the possibility of wrecking large segments of its
own software business while slowly bleeding AOL and thousands of second- and
third-tier ISPs in the process. Is this the perfect script for a follow-up to
TNT's recent TV movie, "The Pirates of Silicon Valley"? Perhaps. Either that,
or it's the beginning of a huge sea change in the Internet universe that most
Net executives can't even fathom at this point.
Yesterday, Microsoft Vice President Brad Chase told the Wall St. Journal that
Microsoft's MSN Internet service intends to be "aggressive with access," and
that Microsoft is considering plans to offer low-priced or even free Internet
access. In addition, Chase added that, "AOL might think about it as a profit
center. That's not how we think about it." In other words, Microsoft is
hinting that it is willing to unleash a free or deeply discounted ISP as a loss
leader in exchange for the hope that this offer would rapidly grow MSN's
subscriber base and erode AOL's market share. Countless other media outlets
picked up this story throughout the day yesterday and made it seem like a free
ISP offering was almost a done deal. Of course, leading ISP stocks like America
Online, MindSpring (MSPG), and Earthlink (ELNK) tanked on the news. Guess what?
I'm not biting on the latest sound byte out of Redmond one bit.
The art of the bluff
Let's think of the full ramifications of a free ISP from MSN at this point.
It's a possibility in the future, but I simply don't see how it's feasible for
Gates and President Steve Ballmer to pull off at this juncture. Let's not
forget that closing arguments for the Department of Justice's antitrust trial
against Microsoft aren't scheduled until the latter part of September. I can't
think of any move that would be construed more as aggressive "predatory pricing
behavior" by the Department of Justice than offering a free ISP. Think of the
thousands of small ISPs, as well as AOL, that would scream bloody murder to the
DOJ as soon as it was unveiled. There's no way Microsoft is going to risk
adding any more fuel to the fire of the antitrust case before the judge's final
ruling. This means any serious plans are still months away, in my opinion.
In addition, a free MSN ISP could potentially wreak havoc with the new pricing
models that were recently unveiled by leading box makers like Dell (DELL),
Gateway (GTW), and Compaq (CPQ). In the past few months, we have witnessed the
birth of a variety of new pricing schemes from the box makers that virtually
give away their PCs to consumers in exchange for agreeing to multi-year
contracts with co-branded ISPs owned by the box makers. Thus, the box makers
are essentially shifting their models away from a flat, up-front price for their
hardware to a model that instead relies on a continuous annuity stream garnished
from monthly subscription fees. A free ISP offering from Microsoft would
clearly throw other offerings like Compaq.net, Gateway.net, and DellNet on their
heads. Wake-up call, everyone. Microsoft can't afford to let this happen.
Last time I checked, the box makers were the world's largest distributors of the
Windows operating system. In other words, I don't see how Microsoft can risk
infuriating some of its biggest clients with a free ISP until Redmond has come
up with a way to partner with the box makers instead of going to war with them.
We all know what happens when one tries to fight a war on three fronts.
Thus, I can only conclude that Microsoft's latest free ISP comments are a bluff
at this point. In many respects, I think this recent threat from Microsoft
plays directly into its ongoing dispute with America Online over
interoperability between Microsoft MSN Messenger and AOL's ICQ and Instant
Messenger. Microsoft, which only recently released MSN Messenger, is clearly
furious that AOL is continuing to block its members from communicating with
AOL's users. Keep in mind, of course, that between Instant Messenger and ICQ,
AOL has a whopping 78 million instant messenging users. MSN Messenger currently
has a just under 1 million members. Yes, it would definitely be nice to have
interoperability and an open standard between all of the various IM devices
available. However, in the meantime, AOL seems satisfied to hide behind
"privacy concerns" and instead announced a partnership with Apple (AAPL) to
develop a Mac version of AOL's Instant Messenger. In addition, AOL announced
today that it would provide national ISPs Earthlink and MindSpring with
co-branded versions of its instant messenging device. AOL already has a similar
partnership with 3Com's (COMS) Palm Computing unit, unveiled a few months ago.
In short, this recent spate of instant messenging partnerships with everyone but
Microsoft has the top command at Redmond obviously furious. Microsoft wants
blood. A free ISP threat is a good way to get the troops on the other coast in
Dulles on full alert.
Who and what is Microsoft afraid of?
Obviously, this brings forth the following question: why is Microsoft so afraid
of a tiny little desktop application controlled by AOL that allows millions of
Net users to harmlessly chit-chat all day? Three words: desktop mind share.
For the moment, Microsoft still has complete control of the PC desktop with its
Windows OS, but AOL is acquiring the types of downloadable applications that has
to be giving Gates fits. Look at the powerful stable of Web-based applications
AOL has amassed that now have the ability to lay on top of the Windows OS
desktop. Not only does AOL control Instant Messenger and Mirabilis' ICQ chat
applications, but AOL recently picked up two additional desktop applications
with the acquisition of Spinner.com, an online radio service, and Nullsoft's
WinAmp MP3 music player. And let's not forget the biggest downloadable Web
application of them all: Netscape's Navigator browser. AOL's Steve Case
continues to maintain that AOL acquired Netscape simply for Netscape's millions
of eyeballs amassed at Netcenter, and not for the browser mind share. Yeah,
sure, Steve.
Microsoft isn't buying Case's story for a minute. If you're Bill Gates and
Steve Ballmer, this collection of downloadable apps controlled by AOL could have
fatal implications for the future of Microsoft. Already, Ballmer and Gates have
watched as AOL has transformed ICQ from being merely a chat device to almost a
mini-browser that now provides a bevy of built-in services such as a search
engine, stock quotes, and free email. Adding additional services like IP
telephony to AOL's instant messengers and integrating ICQ with an online radio
service like Spinner.com would appear to be right around the corner. In other
words, one doesn't have to stretch the imagination that far to envision a day
when AOL-controlled applications like Netscape and ICQ could become direct
rivals to the Windows OS.
In fact, an analysis unearthed during the antitrust trial that was prepared by
Goldman Sachs (GS) for AOL suggested that AOL should "extend the browser to be a
more comprehensive desktop application," and would take the place of Windows as
the user's primary environment. Further documents mentioned the possible
development of an AOL PC "that could avoid using Microsoft software entirely."
Of course, America Online executives quickly moved to crush this speculation,
and Case suggested that AOL had no intention of ever competing with Microsoft in
the operating system world. Maybe so, but with AOL being so close to the Sun
(SUNW) and Linux camp, one can understand why all this talk has left Redmond so
damn restless. A threat to the Windows OS is a direct threat to the primary
lynchpin of the Microsoft empire. In the mind of Gates, AOL must be stopped at
all costs. Which brings us right back to yesterday's Wall St. Journal article.
Accepting sizeable losses from its ISP unit for a few years in exchange for
capturing a significant chunk of the Internet user universe would mean less of a
chance for an AOL PC concoction to pose a serious threat to Microsoft's Windows
franchise.
Possible moves in this maze
Predicting the next moves in this epic battle is a little like trying to win a
cheap prize out of one of those claw machines at the local arcade. You can
spend a lot of quarters playing and getting very frustrated while still coming
out empty-handed. However, I do believe Microsoft's recent comments, along with
peddling off part of MSN Sidewalk to Ticketmaster Online City Search (TMCS)
suggest that a tracking stock of Microsoft's Internet assets is close at hand.
It's now only a matter of when, not if. I also believe the forthcoming launch
of AltaVista's free ISP, coupled with the continued explosive growth of free ISP
NetZero, will spark significant consolidation among second-tier ISPs. All of
these smaller dial-up players are going to need significant size and scale to
remain relevant as free PC offers continue to proliferate, and the persistent
threat of MSN and AT&T (T) WorldNet significantly slicing their monthly charges
loom on the horizon.
An environment of low-fee and free ISP offers will obviously negatively impact
the margins of national ISPs like Prodigy, EarthLink, and MindSpring, but will
punish the local and regional ISPs the most. Thus, finding themselves in need
of additional revenue streams, I expect select ISPs to merge or acquire
second-tier portal sites like theglobe.com (TGLO), FortuneCity, and About.com
(BOUT). As we have seen with AOL, it takes a sizeable user base and millions of
eyeballs to really squeeze out a significant amount of advertising and
e-commerce revenues. Almost all of the ISPs, except for uber-ISP AOL, really
aren't geared to becoming top-tier e-commerce and online advertising players,
but will have to move down that path. So far, a number of ISP executives have
publicly stated that they have no intention of hopping into the portal or
content game. Well, if ISP subscription fees get sliced and diced by AT&T, MSN,
and others, it will be adapt-or-perish time. Being only numbers 32 and 33 in
July's Media Metrix (MMXI) ratings for EarthLink and MindSpring, respectively,
simply won't cut it. ISPs need to find themselves listed in the Top 20 most
trafficked Web sites to really capture a meaningful slice of online ad revenue.
AOL's nightmare scenario
While America Online will obviously be bloodied by any drastic pricing plans
unleashed by Microsoft, I still see America Online finding ways to go toe to toe
with Gates. AOL has weathered this storm before, and will take the full force
of Redmond head-on. If I were Steve Case, the only scenario that would really
terrify me is if Microsoft decides to build upon its interactive TV partnership
and equity investment with AT&T, and decides to partner AT&T's WorldNet and
Microsoft's MSN service together. After all, it's AOL who's currently leading
the open-access cable crusade that is causing AT&T widespread problems in
numerous municipalities around the country. Microsoft could easily take the
WorldNet dial-up unit off Microsoft's hands and flip it into its widely expected
MSN tracking stock. AT&T could then concentrate solely on its cable Internet
business, while Microsoft's free ISP could serve as a holding pen that corrals
millions of dial-up users, and eventually offers AT&T's broadband services to
these users. For the sake of AOL shareholders, let's hope that AT&T and
Microsoft decide to continue "an arms-length relationship," in the infamous
words of TCI's John Malone.
Perhaps the most telling words so far that have hinted at the future moves
Microsoft would make against AOL came from a company e-mail written by AOL
president Bob Pittman, which was revealed during the antitrust trial, regarding
an internal discussion to perhaps ditch the Microsoft browser from AOL. Pittman
stated in this ominous e-mail that "I do think [Microsoft] is too strong to
throw them out of the tent. They can hurt us if they think they have no other
option." How right you are, Bob. Looks like Gates & Co. have reached the same
conclusion. Clearly, Microsoft is one angry mob of spectators that is on the
verge once again of trying to uproot the AOL tent. Only this time, Gates seems
more interested in torching the entire ISP space. Better get ready to call in
the fire department to put out this five-alarm blaze.
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***QUOTE OF THE WEEK***
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"The companies we are worried about are those that are third, fourth, or fifth
in their particular market segments. These stocks are catalyst-driven. We expect
them to be volatile. If the trends slow down, we see a lot of downside from
here."
-- Comments made this week by Henry Blodget, Internet analyst at Merrill Lynch,
regarding his future outlook on the Internet sector in the coming months.
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***WEEKLY PUBLIC INTERNET MARKET NEWS***
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ragingbull.com
-- Wit Capital Partners with AOL for After Hours Trading
-- AmericanGreetings.com Unveils $100M Five-Year Alliance with AOL
-- Go2Net Acquires Dogpile for $55M
-- INTERVU to Acquire Netpodium for $37.2M
-- 3 Com Licenses Phone.com's Browser for Palm Computing Platform
-- XOOM.com Acquires Liquid Market for $45M
-- Carclub.com Partners with eBay
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***WEEKLY PRIVATE INTERNET MARKET NEWS***
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ragingbull.com
-- BravoGifts.com Lands $8M in Funding
-- Works.com Secures $25M in Second Round Financing
-- 911gifts.com Receives $21M Investment
-- eHow Closes $3.5M First Round Led by Hummer Winblad
-- eCal Racks up $5.5M in Financing
-- Eve.com Completes $17.5M Round of Additional Funding
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***WEEKLY INTERNET IPO FILINGS***
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ragingbull.com
-- Resourcephoenix.com
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***QUARTERLY EARNINGS RESULTS***
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ragingbull.com
-- Next Card (NXCD)
-- CDNOW Inc. (CDNW)
-- GoTo.com (GOTO)
-- Talk City (TCTY)
-- Liquid Audio (LQID)
-- Bluefly.com (BFLY)
-- Value America (VUSA)
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***UPGRADES, DOWNGRADES & COVERAGE INITIATED***
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UPGRADES
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-- Yahoo! (Goldman Sachs)
-- AboveNet (Kauffman Bros.)
-- Ticketmaster Online (Thomas Weisel)
DOWNGRADES
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-- GoTo.com (Thomas Weisel)
NEW COVERAGE INITIATED
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ragingbull.com
-- Verio (First Union Capital Markets)
-- Exodus Communications (CIBC World Markets)
-- OneMain.com (FAC/Equities First Albany)
-- EarthLink (Morgan Stanley Dean Witter)
-- Exodus Communications (Morgan Stanley Dean Witter)
-- PSINet Inc. (Morgan Stanley Dean Witter)
-- MindSpring (Morgan Stanley Dean Witter)
-- Musicmaker.com (Ferris Baker)
-- Verio (Deutsche Banc Alex. Brown)
-- Verio (Morgan Stanley Dean Witter)
-- Liquid Audio (BB Robertson Stephens)
-- Liquid Audio (Lehman Bros.)
-- Liquid Audio (USB Piper Jaffray)
-- Digital Courier Technology (E*OFFERING)
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***NEWS LINKS OF THE WEEK***
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"Free" Fanfare Fading - UpsideToday.com
upside.com
Yahoo! vs. AOL: It Could Happen - ZD Interactive Week
zdnet.com
Lycos Turns Up the Music - The Industry Standard
thestandard.net
EarthWeb Acquires SysOpt.com: Drop Out and Cash In - Wired News
wired.com
Would Yahoo's Gain be ExciteAtHome's Pain? - Red Herring Online
redherring.com
WebVan: The $4 Billion Warehouse - Salon magazine
salonmagazine.com
Free-PCs: a Win or a Win Lose? - MSNBC.com
msnbc.com
CBS: Network Plans Internet Stock - Financial Times (registration required)
ft.com
ExciteAtHome May be Back on the Market - Business Week Online
businessweek.com
Small ISPs Plan to Flood Market with Disks - Wall St. Journal (registration
required)
interactive.wsj.com
Firms Jump on Free ISP Trend, But are Users Biting? - CNET News.com
news.com
Microsoft Would Face Free ISP Obstacles - CNNfn.com
cnnfn.com
Messages Worth Millions - MSNBC.com
msnbc.com
************************Advertisement************************
Free! Daily Internet stock picks at the all-new Interactive Business Channel
financial web portal, your one-stop investment shop. Visit IBC for free Internet
stock profiles, Internet stock news, analysis, top newsletters, trader's
bookstore, and much more!
ibchannel.com
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Subject: Raging Bull's Cyberstock Investor Report - August 6
Date: Fri, 6 Aug 1999 17:41:06 -0500
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